Bailey and Carney punch the Bank for International Settlements below the belt

Mark Carney (Governor of the BoE) and Andrew Bailey (Head of the Prudential Regulatory Authority within the BoE) were sharply critical of recent warnings by the BIS that central banks were fueling another crisis by keeping rates too low.   Carney said:  “It’s a report that’s made in a vacuum though, the vacuum of Basel, a world where a central bank doesn’t have a mandate… a world where a central bank is not accountable to Parliament and through Parliament to the people, to achieve specific targets.”  Bailey:   “It’s an interesting commentary from an institution that doesn’t have policy obligations.”

As I wrote in earlier posts, I agree with the substance of these Bank of England remarks, that tightening policy now would be ill-advised.  But, two concerns.

First, these remarks come close to reading like this:  ‘the BIS see clearly what would be in society’s best interests in the long run, but unfortunately we have these local political masters who have set us inflation targets that we need to hit, and doing that means we can’t do what’s right.  What a pity we can’t do the right thing.’

Second, there is an element of this:  ‘you shouldn’t take seriously their views, because their minds are not concentrated by the reality of having a real job to do.’

I doubt anyone at the BoE holds the first view, but it’s a dangerous one to allow to be read into your utterances.

The second I think was intentional and misjudged.  It could be read as an attempt to devalue all independent commentary.  Not a policymaker?  No right to comment, since you are other-wordly.  Presumably academics, journalists, employees of the IMF would fall into the same bracket.   In fact, who would be qualified, outside the BoE itself?   An organisation like the BoE, with so many important powers, and with such imperfect systems holding to account, is in a delicate situation.  It must be seen to welcome scrutiny and challenge, however daft.  The more defensive and undermining it is of its critics, the more likely it runs the risk of corroding the political consensus around its independence.

Besides, the BoE is part owner of the BIS.  Collectively, central banks [ultimately through their governments] have agreed to tolerate a role for the BIS as an independent commentator on central bank policies.  There are good reasons to do it.  One might hope that if there were market failures in monetary or financial economic research, the BIS could act as a focal point for thinking and funding.  The BIS’s independent commentary could potentially be a force for good in orchestrating better global coordination for monetary policy, and averting self-defeating competition between countries over financial regulation.  This independent commentary, even if sometimes unsound or unwelcome, may, in the long term, bolster the independence of member institutions.  Local political regimes may be just a tiny bit less tempted to interfere if there appears to be an expert functioning community, of which the BIS is a part, evaluating what their central banks are doing.

If Carney and Bailey don’t want independent commentary, they should work behind the scenes to get an agreed change to the BIS’ mandate with other owners.  If that’s not an option, they should simply combat arguments they don’t like with economics, and not resort to near-smear-tactics.




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3 Responses to Bailey and Carney punch the Bank for International Settlements below the belt

  1. Tim Young says:

    “If Carney and Bailey don’t want independent commentary, they should work behind the scenes to get an agreed change to the BIS’ mandate with other owners.”

    Good grief, Tony, with Machiavellian ideas like that, and your general conventional dovishness, it won’t be long before you are appointed to the MPC yourself!

    For me, the central bank establishment is just being obtuse to disagree with the BIS, although I would give a little more detail to the argument than the BIS have. My argument would be that, since asset prices and consumption prices must be more or less cointegrated (eg because assets like houses yield a stream of consumption like shelter), it is obvious that ignoring asset prices can lead a central bank to a point at which it is either forced to stick to its consumption price objective and stand aside while asset prices fall, possibly causing financial instability, or comprise its objective and use monetary policy to some extent to mitigate the fall in asset prices. You may remember me asking you a little about the lack of independence of consumption and asset prices in the BoE in the early 2000s, Tony?

    This was apparently the approach the MPC took after the last financial crisis, finding endless excuses to tolerate above-target inflation to mitigate the financial crisis, and I think that you can see it again with house prices, which the MPC have allowed to box them into a corner. If the MPC was making a good faith attempt to meet their inflation objective (which is, remember, supposed to apply “at all times”) in the future, to steer clear of such a trap, they should not have eased monetary policy so much after the financial crisis, and should now be erring on the tight side. The extra point that I am making to add to what the BIS wrote is that it is not necessary for the central bank to be worried by financial stability per se to tighten; the inflation objective justifies it.

    I wrote a response to Carney’s Treasury Select Committee “report in a vacuum” comment on, which is paywalled, but may be read by googling “Tim Young Carney vacuous”.

    • Tony Yates says:

      Thanks for your comments!
      I tweeted a link to your piece.
      I think your argument hangs together, and I put weight on it. It’s just that the counterveiling arguments weigh more heavily for me. And for me that’s based on the reading of the empirics of mon pol which suggest that it’s a relatively weak tool to deal with the problems you are talking about. [Fiscal policy more suited, plus regulatory policy, the latter argument obviously well trodden recently.]

      • Tim Young says:

        Thanks for the publicity, Tony!

        Actually, I strongly disagree that monetary policy is a weak tool to deal with UK house prices, because I think that monetary policy probably would have done a lot to reduce the problem by doing no more than merely what it should have done from about 2005. The root of the problem is a cultural moral hazard that house prices never fall enough to make waiting and saving a wise choice, so any experience which dispels this psychology should help. While I appreciate it would be difficult to a central bank to deliberately engineer a crash in house prices, they should equally not shrink from actions that are otherwise justified for fear of precipitating a correction from unsustainable levels, but that is what MPC did. First, since the inflation target was first breached in 2006, it is clear that monetary policy could have done more to resist the pre-crisis boom. Second, the persistent failure of inflation to fall back to the target post-crisis suggests that the MPC was not honestly following its mandate then either, and if it had, the modest nominal fall in house prices which did occur at that time would have been larger, and there would have more justified repossessions (which, as it was, barely rose in what is supposed to have been a “great” recession). That might just have been enough to dispel some of the cultural moral hazard, and allow the economy to recover in the right way, as it did following the ERM-mandated shakeout in the early 90s.

        Interesting news about Spencer Dale’s resignation wasn’t it! As I remarked in FT online comments, it seems to me that Carney is surrounding himself with people who, while they may have CVs beyond reproach, lack the stature and depth in monetary policy to make the MPC a real debate, of the sort that might include some support for views like those of the BIS, which whether you agree with them or not are reasonable and legitimate. The lights of genuine diversity of views on monetary policy committees are going out across the developed world.

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